Wintrust Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southeastern Wisconsin, with specialty finance and wealth management businesses. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / change |
|---|---|---|
| Net income | $32.1 million | $23.2 million in Q1 2012; up 38% |
| Net income applicable to common shares | $29.4 million | $22.0 million in Q1 2012 |
| Diluted EPS | $0.65 | $0.50 in Q1 2012; up 30% |
| Net interest income | $130.7 million | $125.9 million in Q1 2012; up 4% |
| Net interest margin | 3.41% fully taxable-equivalent (FTE) | 3.55% FTE in Q1 2012; down 14 basis points |
| Non-interest income | $57.4 million | $47.0 million in Q1 2012; up 22% |
| Non-interest expense | $120.1 million | $117.8 million in Q1 2012; up 2% |
| Net revenue | $188.1 million | $172.9 million in Q1 2012; up 9% |
| Cash flow | $99.7 million operating cash provided; $103.9 million investing cash provided; $305.4 million financing cash used | Cash and cash equivalents ended at $213.2 million, down $101.8 million during the quarter |
| Total assets | $17.07 billion | Up 6% from $16.17 billion at March 31, 2012; down $445 million from year-end 2012 |
| Loans, excluding covered loans and held-for-sale loans | $11.90 billion | Up 11% year over year |
| Total deposits | $13.96 billion | Up 10% year over year; down from $14.43 billion at December 31, 2012 |
| Total shareholders’ equity | $1.83 billion | Up 8% year over year |
| Capital ratios | Leverage 10.2%; Tier 1 risk-based 12.4%; total risk-based 13.5% | Above stated “well capitalized” thresholds |
Material changes and operating drivers
- Mortgage banking revenue rose 63% to $30.1 million, primarily on higher loan origination and sale volumes. Mortgage loans originated and sold were $974.4 million versus $714.7 million in Q1 2012.
- Wealth management revenue increased 20% to $14.8 million, reflecting acquired trust operations and growth in existing business. Specialty finance benefited from the Canadian premium-finance business acquired in 2012.
- Interest expense fell $9.0 million as deposit costs declined and funding mix improved. Growth in average earning assets was partly offset by lower asset yields; average earning-asset yield declined 44 basis points year over year.
- Compensation expense increased $8.5 million, including higher commissions and bonuses and staffing associated with growth and acquisitions. OREO expense swung to $1.6 million of income from $7.2 million of expense, including a $3.4 million gain on a covered-property sale and fewer valuation adjustments.
- Loans grew year over year, led by commercial, commercial real-estate and premium-finance lending. Commercial real-estate loans were $4.0 billion, 34% of non-covered loans; 92.6% were located in Illinois and Wisconsin.
Credit, liquidity, debt and notable items
- Non-performing loans excluding covered loans were $128.6 million, or 1.08% of loans, compared with $113.6 million, or 1.06%, a year earlier. Non-performing assets were $189.1 million, or 1.11% of assets. Management noted a slight increase in non-performing assets versus recent quarters.
- Non-covered net charge-offs were $11.9 million, down from $14.4 million in Q1 2012. The allowance for loan losses was $110.3 million; the allowance for credit losses, including lending commitments, was $125.6 million. Management said the allowance was appropriate, while noting its estimation depends on significant judgment.
- Commercial real-estate non-performing loans were $61.8 million, up from $50.0 million at year-end 2012. Total non-performing commercial real-estate loans were 1.55% of that portfolio. The filing highlights stressed local real-estate markets and concentrated geographic exposure.
- Management reported $898.5 million in overnight liquid funds and interest-bearing bank deposits and cited a strong deposit base, liquid short-term investments and access to external funding. The quarter included planned reductions in certain wholesale wealth-management deposits and brokered CDs of approximately $250 million.
- Total deposits declined during the quarter, while the company reported total funding of $14.9 billion. Notes payable were $31.9 million; FHLB advances were $414.0 million; other borrowings were $256.2 million; and junior subordinated debentures were $249.5 million. The $100 million revolving credit facility matures October 25, 2013; the company reported compliance with its debt covenants at quarter-end.
- FDIC indemnification assets fell to $170.7 million from $208.2 million at year-end, including reductions from revised expected reimbursements, amortization and cash received from the FDIC. FDIC loss-share arrangements cover 80% of specified losses, subject to contractual servicing requirements and potential clawbacks.
- On February 1, 2013, Wintrust divested Second Federal’s deposits and banking operations, including approximately $149 million of deposits. After quarter-end, on May 1, it completed the acquisition of First Lansing Bancorp for approximately $38.5 million, acquiring about $365 million of assets and assuming about $323 million of deposits.
- Other comprehensive loss was $8.8 million, primarily reflecting unrealized securities losses and foreign-currency translation adjustments. The company recorded no other-than-temporary impairment charges on available-for-sale securities.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue or margin guidance. Management described continued loan growth opportunities subject to underwriting standards, while cautioning that low interest rates and competition may pressure loan yields and margins. It stated that deposit repricing benefits were diminishing.
- Key risks include adverse economic and real-estate conditions, borrower defaults and potential additional credit provisions, commercial real-estate concentration, interest-rate and market movements, acquisition integration and FDIC loss-share exposure, mortgage repurchase and indemnification claims, funding and capital access, and regulatory or compliance changes.
- Mortgage sale agreements include representations and recourse provisions. The estimated liability for loans expected to be repurchased was $3.5 million at March 31, 2013, down from $4.3 million at year-end.
- Controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
Most important facts for investors to verify
- Whether non-performing commercial real-estate loans and broader non-performing assets continue to rise, and whether allowance levels and collateral valuations remain adequate.
- How sustainable mortgage banking revenue and origination volumes are, given the increase in Q1 revenue and management’s discussion of rate-related volume and pricing changes.
- Whether loan growth and deposit mix can offset lower earning-asset yields and the diminishing benefit from deposit repricing.
- The final purchase accounting, integration costs and performance of the May 1 First Lansing acquisition.
- Changes in FDIC indemnification assets, covered-loan collections and any obligations to reimburse the FDIC under loss-share agreements.
- Liquidity and funding after the quarter’s deposit reductions, covenant compliance, and the October 2013 maturity of the revolving credit facility.
- Potential mortgage repurchase claims, commercial real-estate market exposure, and the sensitivity of earnings to interest-rate changes and fair-value assumptions.